Nigerian Stocks: Worth a Second Look

Tuesday, September28, 2021 / 08:22 AM / by Coronation Research / Header ImageCredit: Ecographics

Nowthat we are almost three-quarters through the year, Nigeria stock marketinvestors might want to take a look at what factors and sectors have driven themarket's performance and why.

Last week, the exchange rate at the Investors and Exporters Window(I&E Window) weakened by 0.49% to a record low of N414.90/US$1, following a17.34% fall in turnover in the space. Elsewhere, the Central Bank of Nigeria'sFX reserves rose by 2.04% to US$36.09bn - its highest level in over six months.We maintain our view that the FGNs US$4.0bn Eurobond issuance and the US$3.3bnallocation from the International Monetary Fund's (IMF) Special Drawing Right(SDR) will help shore up the external reserves and provide some respite to theexchange rate pressure. Amidst these developments, we expect the I&E Windowrate to trade range-bound in the near term

Bonds & T-bills

Last week, the Federal Government of Nigeria (FGN) bond market sawrenewed bullish sentiments as market players sought to cover lost auction bidsin the secondary market. Additionally, expectations of reduced local currencybond supply, and a consequent decline in bond yields following the FGN'sUS$4.00bn Eurobond issuance, led to increased activity in the bond space.Consequently, the average benchmark yield for bonds fell by 7bps w/w to closeat 11.23%. The yield of an FGN Naira-denominated bond with 10-years to maturityrose by 8bps to 12.02%, the yield on the 7-year bond closed flat at 11.60%,while the yield on the 3-year bond fell by 12bps to 9.15%. At the FGN Bondprimary auction, the Debt Management Office (DMO) allotted a total of N277bn(US$647m) to investors, the highest total issuance since the June 2021 auction.This brings the total bond issuance in 2021 so far to a record N2.19trn(FY2020: N1.88trn). Stop rates were unchanged on the February 2028 (11.60%) andMarch 2036 (12.75%) bonds. However, the stop rate on the March 2050 bondexpanded by 20bps to 13.00%. Demand at the auction was relatively strong, witha recorded total subscription of N334.32bn and a bid-to-offer ratio of 2.2x.The auction outcome supports our view that a future rise in bond yields, ifany, is unlikely to be sharp over the coming months due to unaggressiveborrowing as the DMO manages its debt service costs.

Trading in the Treasury Bill (T-Bill) secondary market was bearish,given the sustained liquidity squeeze and the shift in investor attention tothe FGN bond PMA. As a result, the average benchmark yield for T-bills rose by4bps in the week to close at 5.61%. Elsewhere, the average yield for OMO billsrose by 8bps in the week to close at 6.43%. Specifically, the annualised yieldon a 349-day T-bill fell by 1bp to 8.30%, and the yield on a 326-day OMO billshed 10bps to 7.41%. At this week's Tbill PMA, we expect the DMO to roll overmaturing bills worth N111.87bn across all tenors.

Oil

The price of Brent crude rose by 3.65% last week to close at aUS$78.09/bbl, the highest since September 2018. Year-to-date, Brent is up50.75% and has traded at an average price of US$67.76/bbl, 56.78% higher thanthe average of US$43.22/bbl in 2020. Over the week, the price rallied as theHurricane Ida induced output disruptions continued to support the market. Bythe week's close, reports from the Bureau of Safety and EnvironmentalEnforcement (BSEE) showed that 31 production platforms in the Gulf of Mexicoare still evacuated. As a result, approximately 16.18% (300,000 bpd) of thecrude oil production in the Gulf is still shut-in. Elsewhere, supply from theOrganization of the Petroleum Exporting Countries and its allies (OPEC+)remains below target as some of its members, e.g., Nigeria and Angola, havebeen unable to increase production in line with their increased quotas asunder-investment or maintenance delays persist from the pandemic. Consequently,we maintain our view that the price of Brent oil is likely to remain well abovethe US$60.00/bbl mark for several months.

Equities

The NGX All-Share Index (NGX-ASI) edged higher by 0.05% last week.Consequently, the year-to-date return rose to -3.25%. MRS +9.75%, Oando +6.70%,Okomu Oil Palm +5.77% and Lafarge Africa +4.19% closed positive last week,while Presco -8.18%, Honeywell Flour Mills -5.00%, Unilever Nigeria -2.22% andPZ Cussons -1.71% closed negative. Sectoral performances were mainly positive:the NGX Insurance +1.75%, NGX Oil & Gas +1.38% and NGX Industrial Goods+0.23% indices gained, while the NGX Banking -0.79% and NGX Consumer Goods-0.04% indices declined. The Model Equity Portfolio will resume next week

Nigerian Stocks: Worth a Second Look

The domestic recovery has continued in 2021 as various sectors ofthe economy have largely reopened following the pandemic. However, Nigerianstocks are lagging - they are down 3.2% year-to-date. The benchmark All-ShareIndex (ASI) fell by 3.0% in Q1 2021 and 2.9% in Q2 2021 as local currencyT-bill and bond yields began trending upwards and as stocks began to look relativelyexpensive in valuation terms.

Proshare Nigeria Pvt. Ltd.

The YTD losses are primarily thanks to a 16.1% fall in telco andindex heavyweight, Airtel Africa. As a reminder, Airtel Africa was one of thebest performing names of 2020 as foreign investors took advantage of thestock's fungibility as an alternative means to repatriate funds. However, thespread between the stock's Lagos and London listings rose to as high as 145.6%(N551.34) in April 2021, leading to a selloff and sharp correction in the shareprice in Lagos.

On sectors, the banking stocks, led by Guaranty Trust Holdco(-14.2%) and Zenith Bank (-5.4%), were the primary contributor to the marketspoor performance, with the banking index down 6.2% YTD. This is because banksearnings have remained under pressure amidst the low-yield environment, and investorshave largely ignored the fact that they are trading at significant discounts totheir Sub-Saharan African peers and their own historical valuations. Inaddition, the Industrial (-4.5%) and Consumer Goods (-4.3%) sectors, led byNestle Nigeria (-7.0%) and BUA Cement (-12.1%), also lent a hand as investorssold down companies whose margins have come under the most pressure from thehigh-inflationary environment and FX weakness. In the case of BUA Cement, thestock was trading at an incredibly expensive valuation.

The Oil & Gas (O&G) sector has been the bright spot thisyear - the O&G index is up 60.9% YTD. Upstream Oil & Gas companies suchas Seplat Energy (+74.0%) have benefitted from the strong rally in oil pricesthis year. In comparison, the downstream players such as TotalEnergiesMarketing Nigeria (+47.7%) have seen product volumes surge following thereopening of the economy.

Where do we go from here? The second quarter was the first timesince Q1-20 that Nigerian equities have lost in two successive quarters.However, Q3-20 is set to buck the trend. The market has seen renewed interestas local currency yields have begun falling again in recent months and H1-2021earnings impressed across the major nonbank stocks. As a result, the ASI is up2.5% quarter-to-date with less than a week to go in the quarter.

Like we mentioned in our series on Total Returns (see CoronationResearch, "Why you need to studyTotal Equity Returns", 9 August2021 & "The role of dividends intotal return" 17 August2021), current market yields still do compensate for the level of domesticinflation. The monetary authorities also seem to be happy with yields at thislevel. As a result, fixed income remains not an easy sell unless under theheading 'You have nowhere else to go'.

Consequently, equities look more attractive going forwards, withsome select stocks generating yields higher than the 1-year T-bill. Our studyon the Bond Equity Earnings yield Ratio (BEER) buttresses this point. The bondequity earnings yield ratio (BEER) is a metric that is often used to evaluatethe relationship between the earnings yield of a stock market (the inverse ofthe price-to-earnings ratio) relative to bonds. A number above one indicatesthat bonds offer more value than equities.

Proshare Nigeria Pvt. Ltd.

Stocks likely to attract the most attention as we round off theyear include Zenith Bank, Guaranty Trust Holdco, UBA and MTN Nigeria - thesestocks have expected dividend yields of between 6% and 14% (consensusestimates).